The war between Cola and Pepsi has continued to grow despite the effort to grasp world’s beverage market. With efforts aimed at generating $ 66 billion carbonated soft drink industry. The struggle continued from 1990 and 1975 enabled companies to achieve annual average revenue of about ten percent of the global consumption increased. In the study of this case, the issues that make up the focal point of this paper include whether growth in sales fell short of the expectations of the investor.
The paper shall at the same focus on the understanding as to whether there is a new rivalry from brand or other carbonated drinks. Knowledge as to whether the war is only about coke is also a question that shall make up the focus of this study alongside whether there is need for creation of a new product because of health recommendations.
History of the Cola Wars
Cola wars in other words lasted for 100 years when both drinks were created in 1800s at the cascade counter. By then Pepsi, was selling 12 ounces of its beverages at 5 cents while coke was selling 6.5 ounces for 5 cents. Because of this Pepsi Company almost went bankrupt but it later on emerged in the 1930s. Coke during World War II and this made it expand in size compared to Pepsi (Datta, 2001).
Even so, Pepsi in 1970s managed focused on supermarkets doubling its shares, a strategy in which Coke did not emphasize on. According to a challenge held in Dallas and Texas by a small Pepsi bottle revealed that Pepsi was indeed a better brand than Coke thus losing the national market share (Yoffie, 2004). The message was heated up when Coca-Cola Company was taken over by Robert Goizueta and started purchasing its bottlers.
Robert also introduced the diet coke and transformed Coca Colas formula. There was also vertical integration as well as disintegration by the company where coke enterprise spun off its bottlers and developed new anchor bottlers. Coke managed the bottlers without owning them. Pepsi by 1990 was forced to imitate Coke by regulating the bottlers without owning them because the commercial venture was not profitable (Chura, 2003).
Cola wars in terms of evaluation, had tools that will be utilized to evaluate the case including the five Porter’s forces and SWOT analysis.
Brief and Relevant facts regarding the case
The growth rate of Cola and Pepsi according to available reports indicates an increase between 1975 and the 1990s. The industry at the same time had revenue of $ 66billion of the carbonated drink. Americans also consumed 23 gallons CDs in 1970 (Mazzucato, (2002).
The cola wars case is also trying to include some elements of competitive dynamics and historical patterns of vertical
integration in the US soft drink industry. The concentrate manufacturers produced a wide range of raw materials and packaged the blend in plastic canisters that were transported to bottlers to make concentrate diet. Other products included sweeteners added to CSDs and with the normal CSDs, the bottlers only needed to add high fructose or sugar to the drink.
The best known producers of concentrate were Pepsi and Coke but in mid 1990s, the two diversified their operations and maintained direct control of bottling networks. The concentrate business in 1990 was more profitable compared to the bottling business. Nonetheless, the bottling business suffered in the following years because manufacturers of the concentrate were not in a position to squeeze the bottles without impacting their personal distribution.
The people who had invested in the bottling business would also get margins ranging from seven to nine percent. Between the years 1970 to 2004, the number of bottlers reduced significantly from 2000 to 300 and as a result, coke became the first producer of concentrate to develop a franchise followed by Schweppes and Pepsi. The major assumptions used for the study include
Coke SWOT analysis
One of coke’s company strengths is the benefit of having mover products as well as a large client base. The company at the same time had a large market share allowing it to produce in large quantities thus promoting economies of scale. The company has global brand recognition with large distribution networks and global activities that are highly successful. The introduction of coke was the company’s strength.
Some of the company’s weaknesses included the fact that it faced brand failure thus generating product recalls. Focusing on global market at the same company made the company to shun from its focal competencies.
On the other hand, opportunities for the company included creation of innovative advertisement methods, new brands introduction and new global markets. Even so, it still faced barriers including entry to global markets, fierce competition and onset of new beverages.
Pepsi SWOT analysis
Pepsi’s strengths included the fact that it mainly focused on young generation CSDs thus increasing its sales. Because of mass production, the company was in a position to have large economies of scale and to employ gorilla methods for instance Dallas challenge. The other strength of the company included global brand recognition, flexible franchise networks, large distribution networks and creative marketing strategies (Gillespie & Hennessey, 2011).
Some of the weaknesses included smaller market share compared to that of coke, falling behind renowned markets and slow take off especially in global markets imitating Coca-Cola bottle specifically in South America and in Venezuela. The opportunities for the company included introduction of healthy drink Pepsi, the company’s beverage image and its capability to venture into global market and new brand introduction.
The company additionally is faced by major threats including fear to lose market share because of market fluctuation. At the same time, barriers to entry to global markets are a major threat. Reducing brand loyalty and new age drinks also poses a significant threat and competition from local markets selling their products at lower prices.
The five forces analysis of the cola wars
The soft drink industry is profitable and lucrative for producer of concentrate compare to the bottlers because of ease of production of the CSDs. There are reasons that clearly demonstrate the two entities profitability via the five forces and they include
Threats of entrants
There were low entry barriers based on the fact that the two organizations have franchise agreements with their bottlers therefore; they have specific rights in given geographical areas. The companies at the same time have bought different bottling companies thus, making it hard for new entrants to get willing buyers to distribute their products.
The companies at the same time have the benefit of economies of scale thus, allowing for mass production and sell of products at relatively lower prices. This is a move that could lead to losses for new entrants. The two companies in terms of advertisement heavily invested on promotion making it almost impossible for new entrants to competent with the two and achieve visibility.
The two companies at the same time because of their business period have already built brand images and global client loyalty. This could make it hard for new entrants to reach such heights in soft drink markets (Oldroyd, 2012). Any retailer the two companies’ product is given margins between 15 and 20 percent for shelve space. This being the case, new entrants would have a hard time trying to convince retailers to substitute their new products of the two, coke and Pepsi.
As a result, the big organizations may retaliate in case there are new entrants with different prices that would affect them. What’s more, the entry would force one to highly invest in fixed costs as well as distribution charges which can be difficult.
Since there are just a few requirements for concentrate merchandise, the supplier’s bargaining power is relatively low. This is based on the fact that many supplies include carbon dioxide, sugar and caffeine among other basic commodities (Jeffs, 2008). Therefore this leaves the supplier with no bargaining power over pricing because of weak suppliers.
Power of Buyers
According to market share order as indicated in exhibit 6, the main channels for soft drinks are Fast food foundation, food stores, convenience stores and vending among others (Yoffie & Slind, 2006). Being the case, the buyer’s power has been significantly increasing because of retail consolidation, large number of major players and discount prices that are highly sensitive.
Convenience stores are also highly fragmented and as a result, the companies need to pay high prices. At the same time, vendors directly sell to clients hence; they have no power over consumers or buyers.
Threat of substitute
There are many substitutes in the soft drink industry including beer, juice, water and coffee among others available to end users. Many clients are turning from CDSs to non-alcoholic options based on health issues in regards to carbonated drinks leading to obesity and poor health.
Despite the threat being relatively high, concentrate manufacturers adverts, accessibility of the products and brand equity help to provide the products mainly for clients, a fact that many clients cannot realize or meet. These organizations at the same time offer the substitutes to protect themselves from cut throat competition.
It is with no doubt that soft drink industry operates in a duopoly setting with main competitors being Pepsi and Coke. The market for other companies is too small because of the effect in the structure of the industry. The two companies do not agree on advertisement and differentiation and not on pricing thus, preventing the possibility to trading at loss (Gupta, 2009).
Key difficulties while conducting the analysis
Different challenges were encountered when carrying out the analysis including the fact that it was hard to understand how the actual consumers boycott effect in Dallas. The international impact of the products at the same time in other countries in relevance to internationalization and diversification has not been exhausted.
There were wars and counter wars between the two companies and this did not reveal the impact of the other emerging two brands in the market. Lastly, there were geographical areas where other brands besides Pepsi and coke did not perform well and this has not been recorded. The ownership percentages also in the market share could not be verified clearly because the main focus was on the two major brands.
Limitations of the analysis
Difficulty in access of factual record of information of other beverages consumption besides the two major brands was a major limitation for the study. The other limitation is the fact that the study was restricted to the US only and as a result, the impact on other states cannot be ascertained. The study therefore limits itself on Pepsi and coke only comparing only the two.
Conclusions from the Cola Wars
The competing wars between Pepsi and Cola and growing substitutes is affecting the sales and performance of the two brands. Introduction of new brands with different tastes in various markets is one of the available options. It is clear that Coke gained world culture and as a result, they can divide the market into manageable sections with various needs.
They should at the same time focus on globalization where the globe is generally considered and it only needs what it can be offered. The companies by focusing on demographics are in a position to meet different client needs whether non-carbonated or carbonated. The Five porter’s analysis despite this fact reveals that Coke and Pepsi will still enjoy a large market share despite changes in the market.
This is based on the availability of few threats in the market and low suppliers bargaining power with buyers enjoying moderate bargaining power and low substitute threats as well as low economic rivalry.
The two companies therefore ought to face cropping challenges using healthy sweeteners to counter aerated drinks claims that they can lead to obesity facing them. They also need to employ a green strategy to create customer loyalty and enhance their brand. Additionally, they need to settle for more advertising and promotional strategies besides growing their shelf space.
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